Sure, your TFSA (Tax-Free Savings Account) is a great place to store your savings. But is it the best for a new investor who’s looking to outpace inflation en route to a rich retirement? Probably not, especially if you’ve got a time horizon that spans 10 years or more.
Truth is, no equity is free from risk, even the “safe” or defensive ones with large dividend yields. That said, it’s all about risk/reward and finding the right balance for you. By taking too little risk and settling for savings accounts, you’ll lose ground to inflation. Even with GICs (Guaranteed Investment Certificates) and their generous 4.5-5% rates, you may not make a heck of a lot on the basis of real returns (gains after inflation).
Your retirement goals may need you to do better than risk-free investments. And that’s why certain stocks may be worth the risk, provided you get in at a good price. Indeed, stocks are a magnificent investment over extremely long-term horizons. Nothing in the world of risk-free assets comes close. Though I do believe new investors should be comfortable taking risks with stocks, I still believe it makes little to no sense to take reckless risks.
Avoid reckless risk-taking with your TFSA!
By reckless risks, I mean risking your entire principal on an asset that’s extremely volatile, expensive, or based on a shallow investment thesis. It’s fine to speculate, as long as you know when you’re doing it and understand what you stand to lose. It’s not okay to think only about the upside, without considering what could go wrong in a bear-case scenario. To minimize risk, it makes sense to insist on a discount (or margin of safety). That way, you’ll be able to improve your odds and supercharge your TFSA retirement goals.
In this piece, we’ll look at two stocks that I view as undervalued at current levels. Consider Bank of Montreal (TSX: BMO) and Parkland Fuel (TSX: PKI):
Bank of Montreal
Things have turned heavily out of the big banks’ favour. It’s starting to get ridiculous, with various Big Six Canadian bank stocks sporting price-to-earnings (P/E) ratios that are well below their historical averages. At nearly $120 per share, BMO stock goes for 8.9 forward (11.9 trailing) times P/E. The stock’s down over 20% from its 2022 high, thanks in part to recession fears, lackluster quarters, and the American regional banking fears earlier this year.
Yes, it’s not easy to bet on the banks. However, I do think the discount on the sector is starting to get compelling. BMO stock’s 4.95% dividend yield and intriguing multiple make me incredibly bullish. Will the next quarter be a huge beat? It’s looking doubtful as the recession slowly creeps closer. Regardless, I do think the next 5-10 years could reward investors for their patience.
Parkland Fuel
Parkland Fuel is a beaten-down gas station retail play that’s been hurting for a while. Shares are down 33% from their January 2020 highs at writing. It has been a chopper ride in the post-lockdown world. While it has been tough from a macro standpoint, I do think Parkland could have handled things better across various fronts.
Regardless, I’m a fan of the valuation and swollen dividend yield. Shares trade at 16.3 times trailing price-to-earnings, with a 4.12% dividend yield. The $5.7 billion market cap makes Parkland a relative value gem that many may be overlooked. Given its modest size, I also view Parkland as an attractive takeover target by an industry consolidator.
